Tag Archives: law

Paying pharmaceutical firms for capacity is problematic

Castillo et al. 2021 (doi:10.1126/science.abg0889) make many valid points, e.g., vaccine production should be greatly expanded using taxpayer money because the quicker recovery from the pandemic more than pays for the expansion. Castillo et al. also suggest paying pharmaceutical manufacturers for the capacity they install instead of the quantity they produce. The reasoning of the authors is that producers are delaying installing capacity and the delivery of their promised vaccine quantities to save costs and to supply higher-paying buyers first, because the penalties for delaying are small. Producers refuse to sign contracts with larger penalties.

What the authors do not mention is that the same problems occur when paying for capacity. In addition, the capacity needs to be monitored, which is more difficult than checking the delivered quantity. Before large-scale production, how to detect the „Potemkin capacity” of installing cheap production lines unsuitable for large quantities? The manufacturer may later simply claim technical glitches when the production line does not work. Effective penalties are needed, which in turn requires motivating the producer to sign a contract containing these, just like for a quantity contract.

Paying in advance for capacity before the vaccine is proven to work insures firms against the risk of failure, as Castillo et al. say. The problem is that such advance payment also attracts swindlers who promise a miracle cure and then run with the money – there is adverse selection in who enters the government’s capacity contract scheme. Thus capacity contracts should be restricted to firms with a good established reputation. However, vaccines from innovative entrants may also be needed, which suggests continuing to use quantity contracts at least for some firms. If the law requires treating firms equally, then they should all be offered a similar contract.

University incentives not to punish cheating

Universities have incentives not to expel cheaters, because these students would stop paying fees. By extension, there is a motive to avoid punishing academic dishonesty in any way that increases the chance of the student dropping out, like giving a cheater a failing grade. The university then gives a similar incentive not to punish academic dishonesty to its departments, who then pass on these incentives to faculty. In every university I have been in, it is far easier for a faculty member to do nothing about cheating – it requires no work, as opposed to a lot of bureaucracy documenting the cheating, imposing the punishment, dealing with the appeals, etc. There is no punishment for a faculty member who fails to report cheating, but to be fair, also no punishment for a false accusation of cheating, or an accusation that does not have sufficient evidence or gets overturned on appeal.

Even if a faculty member tries to punish academic dishonesty, the cheating student appeals to the university hierarchy and the higher-ups overturn the punishment. If not the first level of the hierarchy, then one of the higher levels. Thus even an inherently honest professor who for psychological reasons would be willing to spend the time to document academic dishonesty if it led to the cheater getting punished does not do so, because in the end there is no punishment.

A solution is to change university incentives: the students who are expelled because of cheating must pay their fees in full for their entire course of studies. A problem is that this leads to legal challenges because the student is not getting the education service but must pay for it. One solution is to require the tuition paid up front, non-refundable on expulsion for cheating. However, in this case students have to take a loan (which may be prevented by credit constraints or risk aversion) and may instead choose universities that do not charge them up front.

The university-side incentives also seem problematic if tuition is fully paid for expelled cheaters, because the university could save on the teaching costs by kicking out all the students on fabricated charges and keep the money. The long-term reputation cost for the university prevents such rip-offs.

A milder way to improve the university incentives is to require the cheater to re-take the course. This may delay the time at which the cheater can take follow-up courses that have the re-taken course as a prerequisite. The resulting delay in graduation may require the cheater to pay extra fees for the additional time, but the extra payment of course depends on the specific regulations of the university.

Firms could short the stock of competitors

If a firm designs a great new product, a more efficient production process or gains some other privately known competitive advantage, then the firm could financially profit by short selling its competitors’ stock before revealing its advantage. The revelation reduces the expected discounted profits of competitors, thus their stock price. Symmetrically, if a firm loses cheap suppliers, suffers a manufacturing breakdown or otherwise becomes less able to serve its customers, then its competitors will probably benefit and their stock will rise. The firm could mitigate its losses by buying rivals’ stocks, with leverage.

Shorting competitors does not seem to be illegal insider trading, as defined by the US courts: the purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence. I am not a lawyer, so this is just a guess, but a firm usually does not possess inside information about its competitors and does not owe fiduciary duty or trust to its rivals. Maybe there is some other reason not to trade in competitors’ stock, but a casual web search did not reveal why.

Window allocation to the rooms benefiting the most

People seem to value having a window in their office or living room, more so than in a stairwell, closet or storage. It would be efficient and simple to design the floorplans to maximise the total benefit derived from windows. However, in both commercial and residential buildings, the corners (with the best window access) sometimes have stairwells or elevators instead of offices or living rooms. For example, in the MIT economics department (building E52), the seminar rooms have the biggest windows with the best view, and one corner of the building is a stairwell. In seminar and teaching rooms, people are supposed to look at the slidescreen or speaker, not out of the window, so the benefit of windows is little. Sometimes a window even adds negative value if the sun shines in people’s eyes and they have to spend a small amount of time closing the blinds.

If building regulations require a stairwell to have windows, thus be adjacent to an outside wall, then it would still be welfare-improving to locate offices at the corners, relegating the stairwell to the middle of a side of the building. Specifically, the side with the worst view or the side most prone to undesirable glare. Another way to comply with window requirements is to construct a shaft in the middle of the building (as in some New York highrises) and put the stairwells next to the shaft. 

„People should have a choice” works both ways

Initiatives to counter unhealthy and destructive habits (smoking, gambling, junk food consumption) by taxing or restricting the addictive goods and services are often opposed with the argument that people should have a choice. One counterargument is that removing temptations from one’s future self is also a choice that people should have. For example, banning oneself from casinos. Similar registries could be instituted to ban oneself from buying alcohol or tobacco – the sales already require checking ID, so all that is needed is to compare the person’s identity against a database. For example, using a machine-readable ID which causes the machine to display “Do not sell” for people who have put themselves on the relevant list. Countries with universal machine-readable identification documents can use their existing systems for this. Examples are the European Union national identity cards.

Other ways to remove temptations from one’s way are restrictions on advertising, eliminating vending machines from a building, liquor stores near schools, alcohol and tobacco from the more visible areas of grocery shops. Just like people should have a choice to block spam emails, calls, web browser ads, they should have a choice to ban street advertising (of addictive goods or anything else) in their residential or work areas. Removing a public ad restricts some people’s right to see it, but empirically most people do not want to see more marketing in public spaces or elsewhere. Symmetrically, displaying a public ad restricts people’s right to avoid seeing it, so the question is how many people’s rights are restricted by banning vs allowing advertising.

The problem of annoying public advertisements may be resolved by smart glasses like Google Glass if these can detect advertisements appearing in the field of view and block these or replace with other images before the user sees these, similarly to how adblock software in browsers works.

Gambling deterrence mechanism

Compulsive gambling is driven by the hope of winning a large amount, so one way to deter gambling addiction is to forbid paying out winnings to people registered as having this problem. In a one-shot interaction, casinos and lottery organisers clearly have an incentive to keep both the stakes and the winnings, but problem gambling is repeated. Sufficiently patient casinos are motivated to establish a reputation for paying out winnings, if the punishment is small or unlikely enough, because such reputation attracts other gamblers, which increases the long-run expected profit of the casino. The gamblers are not interested in reporting the casino for illegally paying out, because they benefit from the payout, and the closure of the establishment would prevent them from satisfying their craving.

However, the gamblers’ desire for big winnings, even with very low probability, can be used to motivate them to report – the law can offer a large sum to anyone who proves that a casino made an illegal payout. The reward can be financed from an even larger fine levied on the law-breaking casino. The reward should of course be in addition to any winnings of the whistleblower if the latter is a patron of the casino, because a gambler should not lose money by reporting. Gamblers are impatient, unlike casinos, so the repeated interaction with an establishment does not outweigh an immediate payout, even if collecting the payout leads to less opportunity to gamble in the future.

Privacy reduces cooperation, may be countered by free speech

Cooperation relies on reputation. For example, fraud in online markets is deterred by the threat of bad reviews, which reduce future trading with the defector. Data protection, specifically the “right to be forgotten” allows those with a bad reputation to erase their records from the market provider’s database and create new accounts with a clean slate. Bayesian participants of the market then rationally attach a bad reputation to any new account (“guilty until proven innocent”). If new entrants are penalised, then entry and competition decrease.

One way to counter this abusing of data protection laws to escape the consequences of one’s past misdeeds is to use free speech laws. Allow market participants to comment on or rate others, protecting such comments as a civil liberty. If other traders can identify a bad actor, for example using his or her government-issued ID, then any future account by the same individual can be penalised by attaching the previous bad comments from the start.

Of course, comments could be abused to destroy competitors’ reputations, so leaving a bad comment should have a cost. For example, the comments are numerical ratings and the average rating given by a person is subtracted from all ratings given by that person. Dividing by the standard deviation is helpful for making the ratings of those with extreme opinions comparable to the scores given by moderates. Normalising by the mean and standard deviation makes ratings relative, so pulling down someone’s reputation pushes up those of others.

However, if a single entity can control multiple accounts (create fake profiles or use company accounts), then he or she can exchange positive ratings between his or her own profiles and rate others badly. Without being able to distinguish new accounts from fake profiles, any rating system has to either penalise entrants or allow sock-puppet accounts to operate unchecked. Again, official ID requirements may deter multiple account creation, but privacy laws impede this deterrence. There is always the following trilemma: either some form of un-erasable web activity history is kept, or entrants are punished, or fake accounts go unpunished.

App for police reports

Australia would benefit from an app or website for reporting parking and traffic violations (Singapore has such a website) and rating drivers. It would make police work easier, and the greater probability of getting caught would deter illegal parking and dangerous driving. To prevent frivolous reports from overloading the system, people should make the report under their own name, which requires proving their identity to get an account on the app. Proving identity online is easy in countries with a national ID system like Estonia, but may require more red tape in Australia.
The app should allow uploading proof of the violation, for example a photo of an illegally parked vehicle or a dashcam video of someone’s dangerous driving. There should also be an option of uploading a signed statutory declaration describing the crime. In summary, the app should make it as easy as possible to prosecute a violator, so it should follow legal procedure and standards of evidence as much as possible.
The current system of calling the police non-emergency number to report small infringements is slow and cumbersome. For example if the answerer of the call does not understand the address, or the problem does not have a clear address (e.g. a car parked in the middle of a nature park), then it takes time and frustration to explain the place at which the law is being broken. An app could easily solve the address issue by allowing automatic location tracking. The current system of reporting by phone also has no way for a caller to provide evidence that someone is breaking the law.
Privacy laws in Australia are sometimes unreasonably strict. Even emergency services cannot see the location of the mobile phone from which they receive a call (https://www.acma.gov.au/theACMA/emergency-call-service-faq-i-acma) Such draconian privacy laws may prevent the uploading of proofs of violations, e.g. photos of illegally parked vehicles. Statutory declarations testifying to someone’s lawbreaking probably do not infringe on the lawbreaker’s privacy, so do not bring legal trouble to the person reporting the violation. Uploading declarations could be used as a first step to make the app useful for prosecution.
The app could also allow positive feedback, i.e. praising polite drivers. If this feedback is verifiable, because the users of the app have proved their identity, then a person applying for a driving job (bus, taxi, lorry) could use a good rating on the app to prove being a safe driver. This would be a selling point in the job interview.
Philosophically, policing anything means that the community agrees to impose punishments for certain behaviours. This sanctioning may be delegated to specialised workers like police officers, judges, prison wardens. The app for reporting violations could be used for distributed policing instead, meaning that anyone in the community can use the app to check the past feedback on others who they interact with. Then the community members can respond in the interaction according to the feedback they see, for example avoid trusting someone with who has been repeatedly reported for lawbreaking. Such a verifiable feedback system then rewards good past behaviour and punishes the breaking of social norms.

“Relative to opportunity” evaluation and anti-discrimination laws

Most countries have some anti-discrimination laws, requiring employers to pay people with different productivities equally, or to give someone who took parental leave their job back after they return. One reason why unequally productive people are paid equally is evaluation “relative to opportunity”, i.e. the bar for a promotion or a raise is lower for someone from a historically disadvantaged group or who has family responsibilities. Suppose that there is a consensus in society for supporting certain groups. Why might the cost of this support be placed only on specific employers, namely those who employ the target group? Why doesn’t the support take the form of direct subsidies from the government to the target group, financed by taxing all employers equally?
An explanation from political economy is as follows. Clever people in society or government want to pay a larger subsidy to high-income members of the target group, perhaps because the clever people are themselves high-income and belong to the target group. However, the majority of voters would not like high-income people getting a bigger subsidy. So the clever people disguise the subsidy as something that looks equal, namely every member of the target group gets the same duration of parental leave, the same guarantee of their job back at the end of leave, the same privileges and special treatment for promotions and raises. The value of these guarantees and privileges is greater for higher-paying jobs. For example, a promotion from a high-paying job usually gives a bigger salary increase than from a low-paying job. A guarantee of getting a high-paying job back after parental leave is worth more than a guaranteed low-paid job. Thus the support provided to the high-income members of the target group is more valuable.
Further, productivity at a high-income job is typically more responsive to the employee’s human capital, and the skills deteriorate faster. A truck driver who has not driven for some years retains a greater fraction of driving ability than a surgeon retains from surgical technique after not operating for the same number of years. The productivity difference between an employee returning from parental leave and someone continuously employed is on average greater for higher-paying jobs. So the cost to an employer of keeping a job for a returning employee instead of hiring a new person is greater if the job is higher-paid. The subsidy to the high-income members of the target group thus costs more per person.
Income is positively correlated with intelligence, so the smart members of the target group are likely the wealthy members who benefit from this kind of unequal subsidy. They are likely to vote and campaign in favour of the unequal support, instead of an equal cash subsidy for everyone. The less smart members of the target group who lose from an unequal subsidy (compared to an equal one) are less likely to understand that they lose. This makes them abstain from opposing the unequal subsidy.
In effect, the smart members of the target group redistribute a baseline-equal subsidy from the less smart (and less wealthy) to themselves, at the social cost of losing some efficiency in the economy. Keeping a job for someone when a more productive potential hire is available means losing the difference in the productivities of the two people. Such efficiency losses are typical of re-distributive policies that are not cash transfers.
In principle, the cost of the current policies could still be equally distributed between employers by taxing them all and subsidising those who employ the target group. Or equivalently, taxing only those who don’t employ the target group. However, to equalise the cost to employers, the firms employing highly-paid members of the target group must be compensated more than the ones employing low-paid members. The differential compensation to firms would call attention to the unequal support that people with different incomes are receiving, thus weakening the disguise of the subsidy. The clever people want to avoid that, so do not campaign for equalising the costs of anti-discrimination laws across employers.

Would a protest influence you?

Help, a politician I don’t like is in power! I should do something about it. But what? I know! I will join a protest – this is something. Now I can feel good about myself for having done something. And post on social media how I opposed evil so effectively. I am a socially conscious, altrustic person.

On a more serious note, one way to evaluate whether a given protest could change the situation is to put yourself in the position of the target audience. If your favourite politician was in power, would this protest change your support for said politician? If you were the politician in power, would you change your policy when many opponents use this protest against it?

Even if the answer is no, a protest may still have some effect, because it may change the preferences of the swing voters. The „no” may come from deeply ideological people, whereas more open-minded folks may conform to the herd. If they see many people opposed to something, they may start to oppose it too.

On the other hand, a protest may have the opposite effect to the one intended. It may harden ideological positions and increase polarisation. If the majority is weakly in favour of a policy, then protests against it may strengthen the support of the majority for it, leading to greater turnout and more yes-votes.

From an economic viewpoint, marching on the street with signs, chanting slogans or commenting on social media has no direct impact on politicians or most voters. The exception is those who are stuck in a traffic jam when a protest closes a street. Rational agents should not pay attention to protests which do not affect them (such activism is „cheap talk” in economic jargon, or at best „money burning”).

Real people may be swayed by the opinion of a large crowd. However, a form of protest that has an objective impact on people’s lives is likely to influence people more, because it affects them via both the opinion of the crowd and the direct impact. Both the belief shift and the hardening of the opposition are probably greater.

There are many illegal means of directly affecting the population, but also some legal forms of protest with objective impact. Economic protest is boycotting certain countries, firms or goods, refusing to work for the regime, and moving elsewhere („voting with one’s feet”), and is usually legal. The objective impact is that if enough intelligent and hardworking people shift their spending and taxpaying elsewhere, then the regime will be in fiscal trouble. If this does not change the policy of the leadership, then at least the lack of money will make the program harder to carry out.

There is a larger personal cost for economic protest than for cheap talk. One has to give up certain goods, or pay more, or experience the hassle of moving residence. This is why most people who threaten to boycott a firm or leave a country do not end up doing so. The threats are just another form of cheap talk, which can be posted on social media to impress other cheap talkers.